Journey to be painful, but necessary
The road ahead is not smooth. The journey is going to be painful. But it is necessary for healing the wounds of the economy and taking it back to normalcy, two eminent economists said yesterday after Bangladesh Bank lifted the restrictions on interest rates and allowed the taka to move more freely.
"It is a good step forward. The rate of interest may rise for private lending, but that is necessary. We have to live through that to tackle the current challenges," said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh (PRI).
For all latest news, follow The Daily Star's Google News channel. He said the interest rate, previously determined by a benchmark -- the Six months Moving Average Rate of Treasury bills (SMART) -- was not properly reflecting the market reality.
"The situation turned such that yields of government's treasury bills and bonds were way above the lending rate for the private sector. Such an anomaly cannot exist in a market," he said. "Now, interest cannot be controlled because there is a huge requirement for borrowing by the government."
Mansur, a former economist at the International Monetary Fund, said interest rates would rise. This may slow the economy further, but it is necessary to overcome the challenges.
He also welcomed the move to let the taka find its value through the introduction of crawling peg -- a flexible exchange rate system.
He said this would stabilise the taka-dollar exchange rate and improve foreign exchange reserves, which have depleted substantially over the last two years.
"That is important," he said.
Until now, there has been an imbalance in the exchange rate and exporters were forced to take Tk 110 per US dollar.
"The depreciation will help increase. The government should also discontinue giving the subsidy for remittance," Mansur added.
Asked whether the measures will bring back stability in the economy, he said: "This is a necessary step, but not sufficient. But without these steps, taking the economy out of crisis would not be possible."
"We have to cut out our spending in the national budget as well," he added.
Mustafizur Rahman, a distinguished fellow of the Centre for Policy Dialogue, said the measures by the central bank will stabilise the exchange rate, foreign exchange reserves, and the overall economy.
"Obviously there are pains but the policies have been taken through direction. We have to take the pain to tackle the risks," he added.
Overall interest rates will increase for the hikes in the policy rate and discontinuation of SMART. The relaxation of the exchange rate regime will make imports expensive as well.
"Although there is a concern regarding imported inflation for higher exchange rate, given the current risks and uncertainty we have to accept this if we want to ensure low inflation and high economic growth," Rahman said.
However, he has some suggestions to make the journey less painful, namely improving efficiency.
"There are areas where efficiency improvement is possible and the costs of doing businesses could be reduced. If that is done, we can minimise the pain in the short term," Rahman said.
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